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Spotlight: Motor trends - will telematics overtake traditions?

telematics

Many motor insurers still take a traditional approach to underwriting vehicle risks. With shifting driver habits increasing the demand for telematics, is the industry poised for change? Alex Croydon, managing director, general insurance UK and Ireland at Verisk explores how telematics is influencing the motor insurance market today.

Alex Croydon Verisk
Alex Croydon, managing director, general insurance UK and Ireland at Verisk

Technologies that are becoming increasingly prevalent in the motor industry give insurers a newfound ability to extract more information than ever before, potentially giving them a much greater understanding of risk.

However, as with any technological advancements, there are certain barriers to mass adoption. Some insurers may feel the traditional methods of pricing and underwriting risk serve them well enough, or that they have concerns around the cost of implementing new technologies, or even that they feel the technology is not quite ready to meet their requirements.

While it can take time for attitudes to shift and the full potential of these technologies to be realised, there are also insurers that have already recognised the benefits of telematics, advanced driver-assistance systems, and other connected car data that they have been quick to capitalise on.

A survey carried out by Insurance Post in association with Verisk explored the attitudes held by motor insurance providers in relation to the challenges they face in underwriting, emerging trends, external data sources, and new technologies.

A traditional industry poised for change

One of the main findings from the survey is that the motor industry is still quite traditional in how it approaches underwriting vehicle risk.  

When asked to rank the five most important external data sources for underwriting, location-based data had the highest number of votes by a considerable margin, followed by Association of British Insurers risk groups, vehicle history, and consumer-consented data. Interestingly, telematics data was still ranked fifth, accurate mileage data was seventh, and ADAS was ninth (out of 11).

ADAS and connected car features are becoming increasingly common in newly built cars with the intention of improving safety but also comfort and accessibility. While there are features than can reduce the likelihood of an accident, others may increase the cost of a motor claim. While ADAS data may have scored quite low on the most important external data sources for underwriting, it scored very highly on data that insurance providers are considering for future use.

It is clear from the results that the industry still values external data sources such as location-based data (postcode and local environment), vehicle history (ownership, MOT, and road tax status), and the ABI risk groups which are based off factors such as vehicle price when new, how much damage it could sustain in an accident, repair costs, performance, and parts availability.

While these can give some insight into the level of risk each driver carriers, they are still not a direct measure of behaviour or usage. How frequently a driver is on the road, where they drive, what time of day they drive at, and whether they have a history of speeding or braking harshly are all highly valuable predictors of risk that are not known during the underwriting process – even at renewal.

Telematics-based motor insurance is slowly gaining traction in the industry, giving insurance providers the ability to substantially remove the guesswork in the underwriting process with access to data on driving usage and behaviour – arguably the strongest predictors of loss.

Changing driving habits generate demand for telematics

Throughout the pandemic when restrictions have come and gone, food delivery services have substantially grown, many workers have been encouraged to work from home, and there has been some general hesitancy to meet up face-to-face, many people in the UK have been less inclined to drive.

In a 12-month period from the summer of 2020 to summer 2021, 81.6% of underwriting respondents to the survey said that there were fewer cars on the road and less mileage driven, and 84.2% observed a reduced number of accidents.

During this period the demand for usage-based insurance has increased substantially, as many drivers felt they should not be charged as much if they don’t drive very often. From a pricing perspective, accurate mileage data is one of the most valuable measures of risk as it is directly correlated with how much a vehicle spends on the road and therefore its risk of having an accident.

According to the survey, if telematics and driver behaviour data become more widely accessible for pricing and underwriting, 88.89% of respondents said the market for telematics will widen slightly, whereas 63.89% suggested it would become the default data for assessing medium to high-risk cases. In terms of eventually replacing the current data used for underwriting motor risk, only 41.67% said this was likely, whereas 33.34% said it was unlikely and 25% were undecided.

Opinion was split on whether insurers would load up prices for customers unwilling to share telematics, with 38.89% suggesting this was like and 33.33% suggest it was unlikely.

There was also a difference of opinion on whether customers’ reticence to share telematics would stop mass market adoption. 52.79% of respondents said this was likely, whereas 16.67% said it was unlikely and 30.56% were undecided.

Penetration of telematics is relatively low (around 3% to 5% of the UK market), and traditionally it has been viewed as a niche product for young or inexperienced drivers that monitor and intervenes where driver behaviour is considered high risk. This is increasingly outdated view as more insurers see the benefits of how driver behaviour and usage data can help them underwrite policies more accurately, and customers are being increasingly incentivised to share their telematic data with discounts and other rewards.

The UK motor insurance market is fiercely competitive, and customers will always shop around for better deals or policies that meet their requirements. This search for the best possible price puts additional pressure on insurers to a fulfil growing demand and do it in a way that is still profitable.

If customers respond positively and consent to sharing their data, connected cars can communicate and share information generated by the vehicle and open a whole new way for insurance providers to assess risk more accurately. Connected cars also represent approximately 14 million of current vehicles in the UK, a figure that is anticipated to rise significantly. As vehicle usage becomes more inconsistent, there are opportunities to use telematics data to distinguish between customers and actively target better renewal strategies.

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